It’s risky to buy shares with Hot Money

Many of the people that lost money when the stock market crashed between 2008 and 2009 did so because they invested with hot money. In fact, the crash of the market was triggered by hot money.

Hot money can be described as short term money looking for quick gains. The money is short term because it is available for a period less than one year. It could be loan from a bank or any financial institution, but the tenor is always short, and the repayment terms merciless.

It could also be your own money, which you will definitely need very soon. For example, money saved or set aside to pay school fees, house rent or any project in the next six months to one year. And it could even be your retirement benefit or pension. The basic character of such money is that you can’t forgo it for a long time without serious implications.

People that use this kind of money to buy shares usually do so to speculate with the expectation that share prices will increase within the short period the money is available, and hence they can repay and still make good money.

When the stock market was booming, with prices of shares rising rapidly every day, a lot of people, in attempt to take advantage of the boom, borrowed money from banks and other organisations, used their retirement benefit, money for house rent and children school fees to buy shares, with the hope that in three to six months, share prices would have doubled. Also foreign investors brought such money into Nigeria and invested heavily into the stock market, of course to participate in the boom.

The stock market can be very unpredictable. It can go up today and come down tomorrow. It can boom this year and crash next year. That is why it is risky to buy shares with hot money. The market may suddenly go down, and instead of quick gain, you may end up with quick losses. That is what happened to people that used hot money to buy shares in 2008.

It started with the global financial crises. Banks in Europe and America became distressed and stopped giving loans. As a result, foreigners and foreign financial institutions withdrew funds invested abroad. In Nigeria, this translated to massive selling of shares by these foreign investors.

As a result, supply (selling) outstripped demand (buying), share prices fell rapidly, leading to crash of the market. From N12.6 trillion in March 2008, total value of shares on the Nigeria Stock Exchange fell to N6.95 trillion by December 2008. People that had borrowed or used short term funds to invest could not recover their money, and to repay became almost impossible. Till date, many are yet to recover from the devastating effect of the crash. So think twice before using hot money to buy shares.